Louisiana Enacts Income And Franchise Tax Changes Which May Require Taxpayer Action By June 30, 2015 - Sales Taxes: VAT, GST

On June 19, Louisiana Governor Bobby Jindal signed several bills amending significant income and franchise tax provisions that are generally effective July 1, 2015. The bills have been enacted as part of a larger state appropriations and tax increase package. Because many of these changes apply to returns filed on or after July 1, 2015, regardless of the taxable year to which the return relates, taxpayers may want to consider filing returns prior to July 1, 2015. Specifically, the legislation eliminates the three-year net operating loss (NOL) carryback provision and extends the carryforward period from 15 to 20 years.¹ Another piece of the legislation reduces certain exclusions and deductions from income, including the dividend exclusion, percentage depletion and the NOL deduction.² Other legislation amends the inventory tax credit and research and development (R&D) credit.³ Also, legislation amends the individual income tax credit for taxes paid to other states.⁴ Other laws reduce many corporate income tax credits and rebates.⁵ Finally, the solar energy and motion picture credits are amended.⁶ Additional tax increases are enacted for taxes other than income and franchise taxes, such as sales and use taxes and cigarette taxes. However, these latter tax changes are beyond the immediate scope of this analysis.

Corporation NOL Carryback and Carryforward

Effective July 1, 2015, H.B. 218 eliminates the three-year NOL carryback in favor of increasing the NOL carryforward from 15 to 20 years.⁷ This change applies to estates and trusts as well as corporations. For estates and trusts, the increased carryforward is effective for NOLs incurred "for any tax year beginning on or after January 1, 2000."⁸

The corporate NOL provisions are effective for "all claims for this deduction on any return filed on or after July 1, 2015, regardless of the taxable year to which the return relates"⁹ except for "an amended return filed on or after July 1, 2015, relating to a net operating loss deduction properly claimed on an original return filed prior to July 1, 2015."¹⁰ The same exception applies in the case of estates and trusts.¹¹ Accordingly, taxpayers with NOLs should consider whether it would be beneficial to file returns prior to July 1, 2015. If a taxpayer intends to carry back NOLs, the taxpayer should consider filing a return before this deadline.

Reduction in Corporation Income Tax Deductions

Effective July 1, 2015 through June 30, 2018,¹² H.B. 624 reduces certain significant income exclusions and deductions. The Louisiana depletion allowance for oil and gas wells is reduced from 22 percent to 15.8 percent (a 22 percent reduction).¹³ The rents and royalties paid for the depleted property may only be deducted to a maximum of 72 percent (corporations). The percentage depletion deduction is capped at 36 percent (previously, 50 percent) of gross income from the property.¹⁴ Because the Louisiana statute providing for modifications to deductions from gross income allowed by federal law¹⁵ is not amended by the legislation, the reduction to rents and royalties paid may be limited to the percentage depletion calculation and not to the deductions from federal gross income for Louisiana purposes.

For taxable years beginning on or after January 1, 2015, the NOL carryforward deduction is also limited to 72 percent of the loss incurred in a preceding year.¹⁶ The legislation does not indicate what becomes, if anything, of the 28 percent of the NOL for which utilization is disallowed.

The 100 percent dividends received deduction is limited to 72 percent.¹⁷ This is a significant development because 28 percent of the dividends reported for federal income tax purposes (prior to reductions pursuant to Internal Revenue Code (IRC) Sections 243 through 245) will generally be included in Louisiana taxable income.¹⁸ The Louisiana deduction for expenses disallowed by IRC Section 280C (research and development credit) is also reduced to 72 percent.¹⁹ Also, certain hurricane benefits and government programs if claimed as deductions are similarly reduced.²⁰

The changes discussed above (depletion, NOL carryforward and dividends received deduction) are generally effective for "an exclusion from taxable income and a claim for a deduction made on a return filed on or after July 1, 2015, regardless of the taxable year to which the return relates" except for "an amended return filed on or after July 1, 2015, relating to an exclusion from taxable income or a claim for a deduction properly claimed on an original return filed prior to July 1, 2015."²¹ However, it should be noted that the general effective date provision conflicts with the language in the loss deduction statute that the limitation applies to "taxable years beginning on or after January 1, 2015."²²

Further complicating matters is that, for returns filed after July 1, 2015 for which a valid filing extension has been allowed prior to July 1, 2015, any portion of an exclusion or deduction disallowed by H.B. 624 is allowed as an exclusion or deduction in the amount of one-third of the disallowed portion of the exclusion or deduction on the taxpayer's returns for each of the taxable years beginning during calendar years 2017, 2018 and 2019.²³

Taxpayers wishing to fully utilize their depletion, dividend, NOL carryforward and other H.B. 624 deductions and exclusions should carefully consider filing 2014 Louisiana income tax returns on or before June 30, 2015.²⁴

Inventory Tax Credit and R&D Credit

H.B. 805 amends the inventory tax credit and the R&D tax credit provisions.²⁵ For taxpayers with a statewide inventory tax credit of $10,000 or more, only 75 percent of the credit that exceeds the taxpayer's liability is refundable.²⁶ The remaining 25 percent must be carried forward for up to five years. Taxpayers with less than $10,000 of ad valorem taxes are unaffected by this law.²⁷ Also, the R&D credit is no longer refundable,²⁸ but excess credits may be carried forward for a period not to exceed five years.²⁹

The changes "apply to all claims for these credits on any return filed on or after July 1, 2015, regardless of the taxable year to which it relates" except for "an amended return filed on or after July 1, 2015, provided that these credits were properly claimed on an original return filed prior to July 1, 2015."³⁰

Taxpayers contemplating the full use for the 2014 tax year of their inventory tax credit and R&D tax credit should consider filing their original extended Louisiana returns on or before June 30, 2015.

Individual Income Tax Credit for Taxes Paid to Other States

Effective July 1, 2015 through June 30, 2018, H.B. 402 limits the individual income tax credit for taxes paid to other states to situations where the other state provides a similar credit for Louisiana income taxes paid.³¹ The credit is limited to the amount of Louisiana income tax that would have been imposed if the income earned in the other state had been earned in Louisiana.³² Also, the credit is not allowed for income taxes paid to a state that allows a non-resident credit against the income taxes imposed by that state for taxes paid or payable to the state of residence.³³

The changes are generally effective for "a claim for a tax credit made on a return filed on or after July 1, 2015, regardless of the taxable year to which the return relates" except for "an amended return filed on or after July 1, 2015, relating to a claim for a tax credit properly claimed on an original return filed prior to July 1, 2015."³⁴

For returns filed after July 1, 2015 for which a valid filing extension has been allowed prior to July 1, 2015, any portion of a tax credit disallowed by H.B. 402 is allowed as a tax credit in the amount of one-third of the disallowed portion of the tax credit on the taxpayer's returns for each of the taxable years beginning during calendar years 2017, 2018 and 2019.³⁵

Individual taxpayers looking to take advantage of the credit for taxes paid to other states under the generally more favorable historical rules should consider filing their returns on or before June 30, 2015.

Tax Credit Reductions

H.B. 629 generally reduces a number of corporation income tax credits by 28 percent for returns filed on or after July 1, 2015.³⁶ For credits requiring pre-approval or precertification, the terms generally apply to credits approved or certified after that date.

Credits modified by this legislation include, but are not limited to the following:

Corporate tax credit for new employees;³⁷
Neighborhood assistance tax credit;³⁸
Tax credit for contributions to educational institutions;³⁹
Corporate re-entrant jobs credit;⁴⁰
Jobs credit;⁴¹
Tax credit for employee and dependent health insurance coverage;⁴²
Sound recording investor tax credit;⁴³
Credit for Louisiana Citizens Property Insurance Corporate assessment;⁴⁴
Musical and theatrical production tax credit;⁴⁵
Angel Investor Tax Credit;⁴⁶
Digital interactive media and software tax credit;⁴⁷ and
Qualified new recycling manufacturing or process equipment and service contracts credit.⁴⁸

The changes are generally effective for "a claim for a credit on any return filed on or after July 1, 2015, but before June 30, 2018, regardless of the taxable year to which the return relates."⁴⁹ The new terms do not apply to "an amended return filed on or after July 1, 2015, but before June 30, 2018, relating to a credit properly claimed on an original return filed prior to July 1, 2015."⁵⁰

For returns filed after July 1, 2015 for which a valid filing extension has been allowed prior to July 1, 2015, any portion of a credit reduced by H.B. 629 is allowed as a credit in the amount of one-third of the reduced portion of the credit on the taxpayer's returns for each of the taxable years beginning during calendar years 2017, 2018 and 2019.⁵¹

Taxpayers seeking to fully utilize their Louisiana corporate income tax credits in the current year are urged to consider filing their 2014 returns prior to July 1, 2015.

Tax Rebates

H.B. 635 generally limits or prohibits certain credits not contracted or certified by July 1, 2015. Specifically, Enterprise Zone credits become unavailable if not contracted before July 1, 2015.⁵² The Louisiana Mega Project Energy Assistance Rebate amount is reduced from 100 percent to 80 percent of Louisiana severance tax paid for certain projects.⁵³ For the Competitive Projects Payroll Incentive Program projects with an advance notice filed on or after July 1, 2015, the amount of the rebate is reduced from 15 percent to an amount not to exceed 12 percent of the gross payroll of new direct jobs.⁵⁴ The investment tax credit (rebate) of 1.5 percent of qualified expenditures is reduced to 1.2 percent.⁵⁵ The rebate associated with the Corporate Headquarters Relocation Program is reduced from 25 percent to 20 percent of the relocation costs for projects with an advance notification filed on or after July 1, 2015.⁵⁶ Finally, the credit base of new jobs payroll for the Quality Jobs program is reduced from 100 percent to 80 percent of the gross payroll if the initial notice of the project is provided on or after July 1, 2015.⁵⁷

Tax Credit Limitations

H.B. 779 limits solar energy systems tax credits to $10,000 for 2016 and 2017 and $5,000 for 2018 on a system installed after June 30, 2015.⁵⁸ The collective refunds, which will be granted on a first-come, first-serve basis, are capped at an amount of $10 million annually through July 1, 2016 and further reduced in later years. Also, H.B. 829 limits the aggregate amount of motion picture credits that can be claimed or redeemed to the state to $180 million annually for periods through June 30, 2018.⁵⁹

Commentary

After considering a myriad of legislative proposals, Louisiana enacted significant legislation to close a well-publicized $1.6 billion shortfall. Due to the effective date provisions, this legislation places immediate pressure on taxpayers to consider whether they should file returns before July 1, 2015. Both action and inaction have consequences. Generally, taxpayers have the opportunity to maintain exclusions, deductions and credits for the 2014 tax year by filing a 2014 return on or before June 30, 2015. This opportunity may apply to any fiscal tax year ending prior to July 1, 2015, in which case the challenge is heightened. It is important to note that these changes presumably also apply to amended returns from all prior years that are filed after June 30, 2015.

Although the legislation makes many amendments, the most significant changes for many taxpayers will involve NOLs. In the initial analysis, if a corporate taxpayer intends to carry back an NOL generated during calendar year 2014, claiming the carryback on a return filed on or before June 30, 2015 appears to be the sole option available. Accordingly, corporate taxpayers contemplating NOL carrybacks on their 2014 returns should consider filing such returns prior to July 1, 2015. Alternatively, if a corporate taxpayer wishes to benefit immediately from a 20 year NOL carryforward period, an extended 2014 return may be filed on or after July 1, 2015. Corporate taxpayers should consider both provisions jointly and in conjunction with the H.B. 624 NOL provisions (as well as other deduction provisions) discussed above as these provisions generally may not operate independently.

The meaning of a number of provisions is less than clear as is the related legislative intent. Much will be left to future interpretation (e.g., the courts).⁶⁰ In light of the legislation discussed above and the nature of the Louisiana economy and state and local government budgets, significant future tax legislation is anticipated.

Footnotes

1 Act 103 (H.B. 218), Laws 2015.

2 Act 123 (H.B. 624), Laws 2015.

3 Act 133 (H.B. 805), Laws 2015.

4 Act 109 (H.B. 402), Laws 2015.

5 Act 125 (H.B. 629), Act 126 (H.B. 635), Laws 2015.

6 Act 131 (H.B. 779), Act 134 (H.B. 829), Laws 2015.

7 LA. REV. STAT. ANN. §§ 47:181(B)(3); 47:246(E); 47:287.86.

8 LA. REV. STAT. ANN. § 47:181(B)(3).

9 LA. REV. STAT. ANN. § 47:287.86(B).

10 H.B. 218, § 2.

11 Id.

12 H.B. 624, § 6.

13 LA. REV. STAT. ANN. § 47:287.745(B).

14 Id.

15 LA. REV. STAT. ANN. § 47:287.73.

16 LA. REV. STAT. ANN. §§ 47:246(A); 47:287.86(A).

17 LA. REV. STAT. ANN. § 47:287.738(F).

18 Louisiana does not adopt the federal dividends received deductions provisions (IRC §§ 243–245).

19 LA. REV. STAT. ANN. § 47:287.73(C)(4).

20 LA. REV. STAT. ANN. § 47:287.738(G).

21 H.B. 624, § 5(A), (B).

22 LA. REV. STAT. ANN. § 47:246(A).

23 H.B. 624, § 5(C).

24 This also includes tax years ending prior to July 1, 2015, but we are focusing on the 2014 calendar year for the sake of simplicity.

25 Note that one of the governor's early proposals for closing the budget gap was to redefine a number of the state's refundable credits as non-refundable credits. A number of credits were involved, but the vast majority of the savings were to come from the credit for ad valorem tax in which the state credits taxpayers for the personal property tax paid to Louisiana parishes and municipalities by taxpayers on inventory and natural gas held, used, or consumed in providing natural gas storage services or operating natural gas storage facilities (the "inventory tax credit").

26 LA. REV. STAT. ANN. § 47:6006(B).

27 Id.

28 LA. REV. STAT. ANN. § 47:6015(B).

29 LA. REV. STAT. ANN. § 47:6015(K).

30 H.B. 805, § 2(A), (B).

31 LA. REV. STAT. ANN. § 47:33(A)(4).

32 LA. REV. STAT. ANN. § 47:33(A)(5).

33 LA. REV. STAT. ANN. § 47:33(A)(6).

34 H.B. 402, § 3(A), (B).

35 H.B. 402, § 3(C).

36 H.B. 629, § 7(A). Provisions with nearly identical language are also enacted effective July 1, 2018 which apply to returns filed on or after that date.

37 H.B. 629, § 2.

38 LA. REV. STAT. ANN. §§ 47:34; 47:6004.

39 LA. REV. STAT. ANN. § 47:35.

40 LA. REV. STAT. ANN. §§ 47:37; 47:287.755(C).

41 LA. REV. STAT. ANN. § 47:287.748.

42 LA. REV. STAT. ANN. § 47:287.759(A).

43 LA. REV. STAT. ANN. § 47:6023(C).

44 LA. REV. STAT. ANN. § 47:6025(A)(1).

45 LA. REV. STAT. ANN. § 47:6034(C)(1)(bb).

46 LA. REV. STAT. ANN. § 47:6020(D).

47 LA. REV. STAT. ANN. § 47:6022(D)(2).

48 LA. REV. STAT. ANN. § 47:6005(C)(1).

49 H.B. 629, § 7(A).

50 H.B. 629, § 7(B).

51 H.B. 629, § 7(C).

52 LA. REV. STAT. ANN. § 47:1787(B)(3)(b). Benefits remain available if an advance notification form is filed prior to July 1, 2015 and the related claim for benefits is filed on or after July 1, 2016.

53 LA. REV. STAT. ANN. §§ 47:2367(E); 47:2455(D)(3).

54 LA. REV. STAT. ANN. § 47:3121(C)(3)(b).

55 LA. REV. STAT. ANN. § 47:3121(C)(4)(c).

56 LA. REV. STAT. ANN. § 47:3114(B).

57 LA. REV. STAT. ANN. § 47:2455(A)(2).

58 LA. REV. STAT. ANN. §47:6030(B)(1).

59 LA. REV. STAT. ANN. § 47:6007(C)(1)(d).

60 Note that there may be unforeseen consequences (for example, reflecting the changes discussed above in the computation of the Louisiana corporation federal income tax deduction).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.